The Ninth U.S. Circuit Court of Appeals majority opinion, reversed the grant of summary by the District Court that a loan owner could be liable for its debt collectors’ tactics that violate the TCPA, effectively closing the window on creditors using a No Vicarious Liability defense for claims arising from its debt collectors. The dissent contended that no agency existed between the loan owner and the third-party debt collectors, and held that the majority is inappropriately legislating a strict liability provision into the TCPA from the bench. Whether an agency relationship exists to establish vicarious liability remains a fact intensive inquiry. As such, extra care needs to be taken to ensure that an entity does not engage in conduct that may be construed as ratification of a wrongful conduct by a third party.

In Henderson v. United Student Aid Funds, Inc., No. 17-55373, 2019 WL 1302915, at *5 (9th Cir. Mar. 22, 2019), the lead plaintiff, Henderson, defaulted on her student loan. Henderson sued United Student Aids Funds, Inc. (USA Funds) for alleged TCPA violations related to the collection of her student loan debt. Henderson alleged she began receiving many calls from debt collectors on a phone number she did not provide consent to be called on. Henderson contended that the pattern of calls and prerecorded messages showed that the debt collectors were combining the use of skip-tracers and auto-dialers in violation of the TCPA. The TCPA explicitly allows for skip-tracing: the technique of obtaining a phone number through online resources only and circumventing consent of the borrower. The TCPA also explicitly allows the use of auto-dialers to call a borrower. The TCPA prohibits, however, a debt collector from combining the use of an auto-dialer to call a skip-traced phone number absent consent of the consumer to call their cell phone.

USA Funds hired a loan servicing company that employs various debt collectors to collect Henderson’s unpaid loan on behalf of USA Funds.1 USA Funds did not have a contractual relationship with the debt collectors employed by the loan servicer or any day-to-day dealings with them. USA Funds did, however, have access to its loan servicer’s reports that tracked the debt collectors’ performance, and could and did review debt collectors’ calling notes. USA Funds also conducted an annual audit of its loan servicers’ debt collectors. The annual audit did not focus on TCPA violations, but USA Funds noted instances of problematic collection practices and called on its loan servicer for corrective action in some cases. USA Funds was also generally aware that auto-dialers and skip-tracers were used by debt collectors in the industry. Henderson argued that this evidence was enough to show USA Funds had agency with its loan servicer’s collectors by ratifying their allegedly improper conduct; the Ninth Circuit majority agreed.

Two years ago, the district court in Henderson v. United Student Aid Funds, No.: 13cv1845, 2017 U.S. Dist. LEXIS 28165 (S.D. Cal. Feb. 27, 2017) was persuaded that USA Funds was not vicariously liable for its loan servicer’s collection practices, holding the loan servicer was “merely an independent contractor” of USA Funds, and USA Funds did not sufficiently control its loan servicer for an agency relationship to impose liability of its debt collectors. The Ninth Circuit’s majority opinion, reversed the grant of summary judgment in favor of USA Funds, holding that USA Funds could be vicariously liable for alleged TCPA violations of the third-party debt collectors employed by its loan servicer. The Ninth Circuit found that Henderson was able to show an agency relationship existed between USA Funds and the debt collectors. The court held that summary judgment was precluded since the evidence proffered by Henderson showed that USA Funds ratified the conduct of its loan servicer’s hired debt collectors either through actual knowledge of the alleged TCPA violations or willful ignorance. The court reasoned that USA Funds knew auto-dialers and skip-tracing were industry norms, and USA Funds conducted audits that indicated its debt collectors may have violated the TCPA. USA Funds, however, did not direct its loan servicer to fire any collectors. Therefore, by USA Funds remaining silent and accepting the benefits of the collectors’ conduct despite knowing what the collectors were doing or knowing of facts that would have led a reasonable person to investigate further constituted a ratification by USA Funds of its loan servicer’s collectors’ conduct. Thus, the majority panel remanded the case back to the district court for further proceedings.

The dissent strongly challenged the majority’s logic and outcome. The dissent observed that everyone concedes that skip-tracing and auto-dialing are independently lawful collection practices, so the fact that USA Funds knew its loan servicer’s collectors may have utilized those techniques cannot help Henderson. Ultimately, the dissent argued that there was insufficient evidence that USA Funds had knowledge that its loan servicer’s debt collectors utilized the alleged combination of auto-dialing and skip-tracing in violation of the TCPA. Further, the dissent pointed out that there is no evidence that USA Funds approved the alleged debt collectors’ combined use of these techniques. In fact, the dissent pointed out, that as the majority noted, critically, when USA Funds conducted its annual audits and found wrongful practices by its loan servicer’s debt collectors, it took action to thwart the problems by reporting them to its loan servicer and asking its loan servicer to intervene. Further, USA Funds had no authority to hire, fire, or discipline problematic debt collectors.

In short, the dissent held there was simply no support that USA Funds knew that the collectors were allegedly using auto-dialers in combination with skip-tracing or ratified any alleged TCPA violation practice. The dissent cautioned that, “under the majority’s theory of ratification if a creditor like USA Funds knows that there are violations in the debt collection industry it is liable for the debt collectors’ actions even if USA Funds took corrective actions. That is not a theory of ratification – it is strict liability, and nothing in the TCPA authorizes such a broad theory.”

Whether an agency relationship exists to establish vicarious liability remains a fact intensive inquiry. However, the Ninth Circuit’s opinion in Henderson has made vicarious liability potentially easier to establish. As such, extra care needs to be taken to ensure that an entity does not engage in conduct that may be construed as ratification of a wrongful conduct by a third party.